How HP’s $170 7-inch tablet could cripple Apple

Posted by Rob Enderle

It all comes down to a perception of value. I’m not going to argue that Hewlett Packard (HP) has a chance of selling more tablets than Apple or generating more revenue.

But HP could have a massive impact on Apple sales and margins with an aggressively priced and well-distributed product.

So even though HP may never sell a lot of tablet, the product’s existence could, just by being on the shelf, reduce Apple’s iPod Mini sales. Let me explain how.

Perception of Value

Back when PCs first hit the market they cost upwards of $3.5K, that was in 1980 dollars, so this would be over $7K in today’s dollars and people bought them. Granted, not in the volume that we see today, but back then even the thought of an under $1,000 dollar machine (over $2K today) would get people lining up at stores (yes I did that). This is because this seemed cheap next to mainframes and mid-range computers that were in the market at that time.

Today, those same PCs wouldn’t even compete with the performance of a smartphone let alone a tablet and that means, except for someone that likes to collect old tech, the value for that same hardware is virtually $0. Current-gen PCs at volume sell at around $650 on average and this average is dropping sharply year over year, even though capabilities continue to increase. This means our perception of value is fluid and based on what we see in the market, rather than what the products actually do.

Samsung Smartphones and 10” Tablets

For much of last decade, Apple’s high iPhone prices were well matched with competing smartphone offerings. But Samsung has increasingly (initially) emulated Apple with a far cheaper similar device, then created arguably more capable devices with even more distinct advantages.

Samsung hit even harder with its Galaxy Tablet, because Apple was initially able to price aggressively, having both the best and most reasonably priced tablet, which was necessary because there were virtually no carrier subsidies for this class of device. However, Samsung’s near clone at an increasingly lower price has been cutting sharply into Apple’s share. In fact, Samsung’s success has been so powerful even Google thinks they are getting too strong.

Essentially, what Samsung has been doing is changing people’s perception of value. Indeed, where the masses would have originally had little problem with paying Apple’s price for the iPhone and 10” iPad, people are starting to act like the prices are a bit too expensive, hence Cupertino's collapsing margins are sharply reduced valuation.

HP’s 7” Tablet Risk

Of all of the companies that Apple competed with during the iPod years they were really only worried about HP. This is why Jobs personally scammed HP’s then CEO Carly Fiorina into private branding the iPod, effectively killing their own MP3 player effort. The reason? Not that HP would field a superior product, but rather, that such a music player would be sold everywhere you could find an iPod, except Apple stores, of course.

This is because HP is arguably better than Apple in terms of shelf real estate and HP’s brand is well regarded. Jobs felt that if a ton of people saw an adequate product at a lower price they would pick it over the iPod. Meaning, either he would massively lose share or have to drop prices catastrophically and dramatically reduce volumes.

Given Apple had to enter the 7” class at a price disadvantage to the Kindle HD and Google Nexus 7 tablets, they are at even greater risk to another major brand debuting with an even cheaper product.

Apple typically holds a up to a 50% premium pretty well but really starts to struggle at a 100% or more. As HP breaks this lower price barrier, the iPad mini may suddenly begin to look too expensive even if folks don’t buy it. In fact it wouldn’t surprise me if Amazon, Google and others moved to match, leaving Apple even more alone at an extremely high price point.

Wrapping Up

This didn’t happen with the iPod because the only credible player - at the time - was the Zune and Microsoft neither pushed price nor adequately funded marketing (and the first device was terrifically ugly, making the device near stillborn). HP’s product is actually attractive, and if nothing else, will likely drive Google and Amazon, the two major player in the 7” class to respond, and Apple will either have to follow or continue to bleed market share to 7” products which an increasing number of us think are better than the now too large 10” offerings.

Given what Steve Jobs did to Carly Fiorina at HP it would be kind of ironic if Meg Whitman, a political peer, finally nailed Apple to the wall. Granted it would be even better of HP sold a lot of 7” tablets but the rest of the competition in this class that may be too much to hope for.

However, if Amazon and Google follow, you could argue that from a pricing standpoint, HP will have become the price leader in a class of products Apple once owned. Even that seemed impossible a few years ago, and once again illustrates that Apple has not replaced the critical Steve Jobs skills it lost.

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